Investment Decisions on Illiquid Assets: A Search by Jaroslaw Morawski, Prof. Dr. Heinz Rehkugler

By Jaroslaw Morawski, Prof. Dr. Heinz Rehkugler

Actual property, inner most fairness, arts, or even wine are gaining expanding recognition as capital investments. appealing risk-return profiles and excessive diversification potentials cause them to beneficial additions to funding portfolios. Their major trouble, in spite of the fact that, is the low point of liquidity. Such resources can't be received or bought speedy with out compromising huge parts in their price. regardless of its excessive functional relevance, this factor has up to now bought in simple terms little recognition from researchers.

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Condominium investments in selected German urban areas have been chosen for this purpose. The analysis of their liquidity gives also the opportunity to discuss problems arising in the implementation of the search theoretical approach. Determination of the values of model parameters constitutes the main difficulty. Although their interpretations within the search model are relatively straightforward, some of them cannot be observed directly. The necessity to fall back on measurable proxies results in further sources of biases.

24. While the former ones become active only if the current market price drifts away from the fair valuation of the asset, the latter ones buy and sell (to some extent) independently of the market price level. As noted by Black (1986), a market with full information and without noise, no matter how big, would be extremely illiquid. If prices fell below the fair value, everybody would like to buy; if prices rose above the fair value, everybody would like to sell; and with prices at the fair level, nobody would have an incentive to trade.

It constitutes an important part of many theories of market microstructure and is present in numerous models; see Copeland/Galai (1983), Kyle (1985), or Glosten/Milgrom (1985). See also O’Hara (1997), Chapter 3, for a review. , transactions of larger blocks of shares. See Dann et al. (1977), Holthausen et al. (1987), or Keim/Madhavan (1996). See also O’Hara (1997), pp. , for a review. 1 Definition of Liquidity 23 Price tion size exists above which an inferior price has to be accepted and the impact of trading becomes relevant.

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